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ECON 305 Lecture 1

This document provides an outline for an economics course lecture on macroeconomic topics. It introduces concepts like GDP, unemployment, inflation, and recessions. It discusses the Great Recession of 2007-2009 and COVID recession, key macroeconomic indicators for the US, Eurozone, and Chinese economies, and foundational concepts such as aggregate output, unemployment rates, inflation rates, Okun's Law, and the Phillips Curve.

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Kevin Bao
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50 views

ECON 305 Lecture 1

This document provides an outline for an economics course lecture on macroeconomic topics. It introduces concepts like GDP, unemployment, inflation, and recessions. It discusses the Great Recession of 2007-2009 and COVID recession, key macroeconomic indicators for the US, Eurozone, and Chinese economies, and foundational concepts such as aggregate output, unemployment rates, inflation rates, Okun's Law, and the Phillips Curve.

Uploaded by

Kevin Bao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECON 305: Lecture 1

The Macroeconomy

Instructor: Jaime Meza-Cordero, Ph.D.


Outline
• Introduction to the course
• Global Macroeconomic Topics:
– The Great Recession 2007-2009 and COVID
2020-2021 Recession
– The US Economy
– The Euro & Chinese Economy
• Foundational Macroeconomic Concepts
The Great Recession
• In 2007, U.S. housing prices started declining,
which led to a financial crisis.
• The financial crisis turned into a major
economic crisis with falling stock prices.
• In the third quarter of 2008, U.S. output growth
turned negative and remained so in 2009.
• Through the trade and financial channels, the
U.S. crisis quickly became a world crisis.
The Great Recession
Output Growth Rates for the World Economy, for
Advanced Economies, and Developing Economies,
2000–2018
The Great Recession
• Stock prices in the United States, the Euro area,
and emerging economies, 2007–2010
The US Economy
• Largest global economy. In 2018:
• Output of $20.5 trillion (24% of world output).
• Output per capita is $62,500 (one of the world’s
highest)
• Important macroeconomic indicators:
The US Economy
• Since 2020, the global pandemic forced US public
health officials to adopt measures such as
commercial closures (restaurants, gyms, sporting
events, concerts, etc.)
• This resulted in a decrease in production and
increase in unemployment.
• By definition, the GDP decrease during
consecutive months is defined as a recession.
The Euro Area
• The European Union (EU) is a group of 27
European countries with a common market.
• In 1999, the EU formed a common currency area
(Euro area). Currently, 19 countries use the euro.
• Important macroeconomic indicators:
The Euro Area Debate
• Supporters of the euro argue:
• No exchange rates to worry about.
• Creation of a large economic power.
• Stability.

• Critics argue:
• No monetary policy capability for euro countries.
• Loss of exchange rate as an adjustment
instrument within the euro area.
The Chinese Economy
• China has been growing very rapidly for more than
three decades.
• Current output is $13.5 trillion (about 60% of the
US).
• Output per person is approximately 15% of US.
• Important macroeconomic indicators:
Key Macroeconomic Concepts
• Aggregate output: Is useful for understanding
the production and income of an economy, its
growth rate, and identify business cycles.
• Unemployment: Number of people without a job
that are searching for one.
• Inflation Rate: Growth of the price level.
Aggregate Output
• The measure of aggregate output is called gross
domestic product (GDP). GDP can be measured
by following three alternative methods:

1. GDP is the value of the final goods and


services produced in the economy during a
given period. (Expenditure Approach)
– Note: In order to avoid double-counting, count only final
goods, not intermediate goods.
CLASS EXERCISE
• The economy has 2 firms: a steel producer and a
car producer, as seen below.
• What is the GDP of this economy by calculating
the value of all final goods sold?
CLASS EXERCISE SOLUTION
• What is the GDP of this economy by calculating
the value of all final goods sold?

• GDP = $200
Aggregate Output
2. GDP is the sum of value added in the economy
during a given period.
• The value added is the value of the production
minus the value of the intermediate goods used.
• In this two-firm example, the value added equals
$100 + $100 = $200.
Aggregate Output
3. GDP is the sum of incomes in the economy
during a given period.
• Aggregate production equals aggregate income.
• From the income side, GDP is equal to the sum of
labor income ($150) plus profit income ($50).
Aggregate Output
• Nominal GDP is the sum of the quantities of final
goods produced times their current price.
• Nominal GDP can increase for two reasons:
• The production of most goods increases in time
• The price of most goods increases over time
• Real GDP is the sum of quantities of final goods
times constant (not current) prices.
• Note: We need to define the base year and use
the prices from that year in the calculation.
CLASS EXERCISE
• Consider an economy that only produce cars as
described:

1. Calculate Nominal GDP for 2011, 2012 and 2013.


2. Calculate Real GDP for 2011, 2012 and 2013
using 2012 as the base year.
CLASS EXERCISE Solution
• Real GDP in 2011 (in 2012 dollars) = 10 cars x $24,000
per car = $240,000.
• Real GDP in 2012 (in 2012 dollars) = 12 cars x $24,000
per car = $288,000.
• Real GDP in 2013 (in 2012 dollars) = 13 cars x $24,000
per car = $312,000.
Aggregate Output Growth
• GDP growth rate: Since 1960, the U.S. economy
has gone through a series of expansions,
interrupted by short recessions.
• The 2008−2009 recession was the most severe
recession in the period from 1960 to 2018.

• G D P growth in year t is calculated as:


(Yt − Yt-1)/Yt-1 * 100
Unemployment Rate
• Employment is the number of people who have a job.
• Unemployment is the number of people who do not
have a job but are looking for one.
• The labor force is the sum of employment and
unemployment.

• The unemployment rate is the ratio of the number of


people who are unemployed to the number of people
in the labor force.
Unemployment Rate
• Countries rely on household surveys to gather labor
information and compute the unemployment rate.
• The U.S. Current Population Survey (CPS)
interviews 60,000 households every month.
• A person is unemployed if a) does not have a job
and b) has been looking for a job in the last four
weeks.
• Those who do not have a job and are not looking
for one are counted as not in the labor force.
• Discouraged workers stopped looking for work.
Inflation Rate
• Inflation is a sustained rise in the general level of
prices.
• The inflation rate is the rate at which the price
level increases between two periods.
• The rate of inflation is calculated by:
𝜋𝑡 = (𝑃𝑡 − 𝑃𝑡−1 )/𝑃𝑡−1
• The Consumer Price Index (CPI) is a measure of
the cost of living constructed after collecting price
data for 211 items in 38 US cities.
Okun’s Law:
Growth and Unemployment
• Output growth that is higher than usual is associated
with a reduction in the unemployment rate.
• Output growth that is lower than usual is associated
with an increase in the unemployment rate.
Phillips Curve:
Inflation and Unemployment
• A low unemployment rate leads to an increase in the
inflation rate.
• A high unemployment rate leads to a decrease in
the inflation rate.
The Short, Mid, and Long Run
• Short run: Movements in output are primarily driven
by movements in demand.
• Medium run: An economy tends to return to the
level of output determined by supply factors, such as
the capital stock, the level of technology, and the
size of the labor force.
• Long run: An economy depends on its ability to
innovate and introduce new technologies, how much
people save, the quality of the country’s education
system, and the quality of the government.

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